THE EFFECT OF INCOMPLETE INFORMATION ABOUT DEMAND ON PREEMPTION

In certain circumstances, a first-mover need not preemptively invest in capacity to discourage entry into a new market. Asymmetric learning about buyer acceptance may make preemption unnecessary. This paper explores the tension between competitive pressure to invest and the real option value in an entry opportunity under uncertainty about demand. If an outsider's expectation about buyer valuation makes entry appear less attractive, and if an incumbent can keep proprietary its updated information about demand, then it may be able to secure its advantage and partially deter imitators without a substantial initial capacity investment.